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Unformatted text preview: e should’ve
said
. Instead she says that
.
We forge ahead by assuming consumers can rank all bundles and that their rankings are logical. Formally: 8
ECO 204 CHAPTER 2 Modeling Consumer Choice and Behavior: Preferences and Budget Constraints (this version 2012-2013) University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. Assumption: Consumers have “Complete Preferences”:
For any two bundles
in either
or
or
.
That is, the consumer is able to rank any two bundles by whether she prefers one over another or if she’s indifferent.
Assumption: Consumers have “Transitive Preferences”:
For any three bundles in if That is, if her preferences are logical then when she says and
and then
then we can say . If a consumer has “complete and transitive preferences” then she has “rational preferences”.
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Here’s a review of a book written by Daniel Kahneman who won the Nobel Prize in economics for his work on
“irrational” consumers.
Book Review: Thinking, Fast and Slow by Daniel Kahneman
A Nobel laureate’s new book cautions us not to trust our gut
By Roger Lowenstein
For the last decade or so a band of scholars has been trying to cast off the long -accepted “rational agent”
theory of economic behavior—the one that says that people, in their economic lives, behave like calculating
robots, making rational decisions when they buy a stock, take out a mortgage, or go to the track. These
scholars have offered a trove of evidence that people, far from being the rational agents of textbook lore, are
often inconsistent, emotional, and biased. Perhaps tellingly, the pioneers of this field were not economists.
Daniel Kahneman and Amos Tversky were Israeli psychologists who noticed that real people often do not
make decisions as economists say they do. Tversky died in 1996; six years later, Kahneman won the Nobel Prize for economics.
Thinking, Fast and Slow, Kahneman’s new and most accessible book, contains much that is familiar to tho...
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